Wednesday, April 17, 2013

IMF fears new risks to global economy; Recovery or rot for Tesco?; The 'never-ending' global crisis; A bull case for Apple; 'Terrorthon'


1 IMF fears new risks to global economy (Larry Elliott in The Guardian) The International Monetary Fund has warned that new risks to global financial stability are already emerging before the problems left by the deepest slump since the 1930s have been sorted out. In its half-yearly healthcheck on the financial system, the Fund said failure to deal with old and new risks risked propelling the five-year old crisis into a fresh chronic phase.

José Viñals, the IMF's financial counsellor) said the improvement in financial markets seen over the past six months would not be sustained unless policy makers addressed "key underlying vulnerabilities". The Fund's Global Financial Stability Report (GFSR) identified the euro area as one of the two significant legacy risks from the crisis. It said EU banks might need to reduce their leverage by a further $1.5tn, and that credit was still not flowing to the countries on the periphery of the single currency zone.

He added that the three new risks were the US, where corporate debt underwriting standards were "weakening rapidly"; the possibility that a flood of cheap money from developed countries could de-stabilise emerging markets; and the dangers involved in unwinding prolonged monetary easing in America. "Put simply, we are in uncharted territory", Viñals said.

2 Recovery or rot for Tesco? (Robert Peston on BBC) Tesco has probably had worse or more humiliating days. But not for a long time. Pulling out of the US, with the abandonment of its Fresh & Easy venture, is costing it £1.2bn in money and probably as much again in loss of face. Because of that loss, and the cost of revitalising sluggish British stores, profits have fallen dramatically - by 52% to £2bn before tax. 

Here is the thing: this is the first drop in reported profits at Tesco since 1993-94. But how different the world was for Tesco 19 years ago. Back then it was about to embark on a programme of expansion and sales promotion that would turn it into the UK's most powerful retailer (by far). Today, Tesco still looks for and enjoys growth in Asia, and online. 

That said, there have been signs in the past year that Tesco's costly investment to improve service and stock in British stores has stabilised the business. There has been a return to very modest growth in underlying or like-for-like sales in the second half of 2012-13, in spite of recent weeks' headwinds from horse in the mince, although growth at Sainsbury remains faster.

But here is the big change at Tesco, with which it is gradually coming to terms. For years its success was built on its entrenched view of itself as the upstart pretender, running rings around the old retailing establishment. Today it is the retailing establishment, which makes it the target rather than the challenger - and all the more vulnerable in an economic climate that is likely to remain inclement for years. So it is a big moment for the company.

If serious recovery doesn't materialise at Tesco this year, questions will start to be asked - just as they were in the 1990s about M&S and Sainsbury - about whether Tesco's time as king of retail is over. 

3 The ‘never-ending’ global crisis (Khaleej Times) The world economy continues to face a downturn. With prices of gold getting bearish and international donors taking a backseat, tough times are ahead for the developing countries. The global growth is projected at 3.3% in the current fiscal year, down from earlier estimates of 3.5%. The hard fact is that more than five years after the global financial meltdown, there is no damage control strategy undertaken by governments worldwide that has actually worked. 

Politics is partly to blame for this dismal state of affairs. The escalation of tensions in the Pacific Rim has stymied prospects of growth. But interestingly, Japan, regardless of the looming threat from North Korea, is registering growth. Tokyo is significantly on the rise as Prime Minister Shinzo Abe’s aggressive policy of monetary and fiscal stimuli has successfully countered deflation and brought an end to decades of economic stagnation. Abe’s approach has sharply diverged from the pro-auterity mantra of the EU.

On the contrary, the US approach of stimulating the economy — with the explicit intention to beat stagnation — has also shown some good results. Though pundits say the growth is short-term driven, it is nonetheless more than enough to keep the economy afloat.

Keeping aside the track record of statistics of economic indicators, the unemployment and lack of investor confidence is acting as a major impediment. It is here that the government should reflect upon and pool in their resources to inject confidence of donors, investors and the people at large. The world, indeed, looks forward for a New Deal. The forthcoming G-8 summit in London can perhaps guide the world in that direction.

4 A bull case for Apple (Jay Yarow & Henry Blodget in San Francisco Chronicle) Wall Street has basically given up on Apple. The stock has tanked more than 40% from a peak of $702 last September to a new low of around $400. Apple has $150 billion of cash and no debt, which means that the market's assessment of Apple's actual business is even more pessimistic. (If you buy the stock, you get the $150 billion of cash along with the company). Apple is also already paying a dividend of 2.5% — and this dividend is expected to increase going forward.

To put this in the most direct terms: Apple is now trading at a lower valuation than Dell. That is a seriously low valuation! And it's one that suggests that there may be a compelling risk/reward for those brave enough to buy the collapsing stock at this level.

To be sure, much of the pessimism around Apple is justified. The case against the company is very easy to make right now. But, buried in the heap of terrible news is some good news: Wall Street has now become so pessimistic about Apple that it's possible that investors will be positively surprised going forward. At this valuation, Apple really does have to be in the early stages of an inexorable long-term decline for the stock not to provide a reasonable return.

How do we know? Because, in the last fiscal year (ending in September), Apple generated more than $40 billion of cash. At that rate of cash generation, it would take Apple only six years to earn enough cash to equal the value that Wall Street is currently placing on its entire business ($240 billion). In other words, if you were able to buy all of Apple today for the current market price of $390 billion, you would be able to pocket the company's $150 billion of cash. Then, if the company's cash generation remained the same, you would only have to wait six years before you got back ALL of the cash you used to buy the company. Then you would own Apple's business free and clear, for nothing. The stock's current price suggests that Wall Street thinks that Apple's cash generation will collapse going forward.

5 Zapiro cartoon in Johannesburg Times: ‘Terrorthon’
http://www.timeslive.co.za/local/2011/06/13/zapiro-cartoons

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